In the realm of liability insurance, the terms “deductible” and “self-insured retention” are often used interchangeably, but the two provisions have important differences. Among other things, “policies which are subject to self-insured retentions are ‘excess policies’ which have no duty to indemnify until the self-insured retention is exhausted.” Century Indemnity Co. v. The Marine Group, No. 3:08-CV-01375-AC (D. Ore. Dec. 3, 2012), quoting Pacific Employers Ins. Co. v. Domino’s Pizza, 144 F.3d 1270, 1276–1277 (9th Cir.1998). This distinction is “well recognized” (id.), but it is sometimes overlooked or ignored. See, e.g. Alticor, Inc. v. National Union Fire Ins. Co. of Pennsylvania, No. 1:07-cv-1079 (W.D. Mich. Jan. 4, 2013) (“the . . . policy has a . . . $2 million deductible, or self-insured retention”).
An insurer’s liability under an excess policy is typically subject to conditions that are unrelated to the insured loss—exhaustion of the underlying insurance being the most common. In policies subject to self-insured retentions, therefore, the insured must sometimes fulfill the responsibilities of an insurer.
State National Insurance Co. v. County of Camden, Civ. No. 08-5128 (D.N.J. Dec. 19, 2012), involved a liability policy issued to the picturesque County of Camden, New Jersey. The policy was subject to a Self-Insured Retention (“SIR”) Endorsement, which obligated the County to “provide an adequate defense and investigation of any action for . . . actual, potential or alleged damages.” In the event the County failed to provide that defense and investigation, the Endorsement stated that the insurer “shall not be liable for any damages or costs or expenses resulting from” the underlying occurrence.”
The County and its insurer ultimately squared off in litigation over responsibility for a multi-million dollar award to a motorist who collided with one of the County’s guardrails. One of the discovery disputes in that litigation made it necessary for the court to determine which party bore the burden of proof on the issue of whether the County had, in fact, adequately investigated and defended the underlying claim.
The County argued that the SIR Endorsement was “essentially an exclusion cloaked in a condition precedent’s clothing,” but the court concluded that the Endorsement had the “essential character” of a condition precedent. For that reason, it held that the County, as insured, bears the burden of proving that it provided itself with an “adequate defense.” If the County cannot satisfy that burden, it cannot recover under its policy.
The court called Camden a “close question,” which shows it is important for a self-insured retention to spell out the terms that distinguish it from a deductible. American Safety Cas. Ins. Co. v. City of Waukegan, 678 F.3d 475, 481-82 (7th Cir. 2012), teaches the same lesson. In Waukegan, the insurer argued that its duty to defend did not attach until the insured city had both incurred and paid $100,000 in legal expenses. The Seventh Circuit dismissed the argument, finding that the insurer was improperly relying on “[a] $100,000 deductible(which the policy calls a ‘self-insured retention’).”